Prohibited Relationships

When processing the Previous Participation clearance (Form 2530), HUD looks for prohibited relationships (e.g. those with a conflict of interest) between and among ownership boards and management agent boards.  This issue is addressed in 24 CFR 891.130, and applies to PRAC 202s and 811s, as well as to loans financed under §§ 891.655 through 891.790.

It is a conflict of interest if:

1. An officer or board member of either the Sponsor or the Owner/Borrower has any financial interest in a contract with the Owner, or with any firm which has a contract with the Owner.  This restriction applies as long as the individual serves on the board and for 3 years after his/her resignation or final closing, whichever is later.
2. Three or more people, salaried by the sponsor/management affiliate who serve as non-voting directors on the owner’s board of directions are parties to any of the following contracts:
   • (a) Management contracts (including associated management fees);
   • (b) Supportive services contracts (including service fees) under the Supportive Housing for the Elderly Program; and
   • (c) Developer (consultant) contracts.

Any person with a conflict of interest (i.e. between the Sponsor or Owner/Borrower and any development team member, or between development team members) is prohibited until two years after the final closing, when a property changes hands.

What does this mean?

If there is a prohibited relationship, those individuals on both the owner’s board and the management agent’s board are technically required to resign from both boards, and may not participate on either board for at least three years after their resignations.